New York has long been considered a favorable jurisdiction for the Merchant Cash Advance (MCA) industry, with courts consistently affirming that MCAs are legitimate purchases of future receivables, not loans. This distinction has shielded MCA agreements from New York's usury laws, with courts often citing the presence of "reconciliation" provisions as safeguards. These provisions allow for adjustments to daily payments based on a percentage of revenue rather than fixed amounts.
However, a pivotal development occurred in October when the Appellate Division of the Supreme Court of New York, Second Department, reviewed an MCA agreement utilized by Crystal Springs Capital. The court determined that this specific agreement constituted a criminally usurious loan, highlighting that daily withdrawals were fixed amounts unrelated to sales, and the repayment obligation was absolute, challenging the narrative that it was a legitimate purchase of future receivables.
This landmark decision not only marks a departure from the previous stance of New York courts but also sets a precedent that may empower defendants across the state. The ruling opens the door for a robust usury defense, asserting that certain MCA agreements could, in fact, be deemed illegal loans. This shift comes at a time when the New York Attorney General has secured victories against predatory lenders, signaling a broader crackdown on usurious financial practices.
In the context of New York law, interest rates exceeding 16 percent are considered usurious, with criminal implications arising at rates surpassing 25 percent. As defendants leverage this recent decision, the landscape for MCAs in New York may see increased scrutiny and legal challenges, potentially reshaping the regulatory framework governing these financial instruments.
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